Sirius XM Radio (NASDAQ:SIRI) has grown its subscriber base despite a revolution in the music industry led by the growing smartphone adoption rate. This trend has reshaped the music industry and created a niche for some impressive, fast growing competitors like Pandora Media (NYSE:P) and Spotify. Still, SIRI has structural advantages because of their proprietary content and content distribution. These advantages should continue to provide a significant competitive moat against current and future competitors.
PANDORA IS A PRICEY STOCK, BUT A POPULAR COMPANY
Pandora (P) became a public company with a lot of fanfare, but since then, many of the market headlines have turned negative as market watchers almost unfairly single out the company for its high valuation. Just to be clear, we are not bullish on this stock. We think the company has an unfavorable valuation. The company has not made a profit and is not expected to in the coming year, but it trades at a price/sales ratio of 15.88. But still, bears should be careful not to confuse an overvalued stock for a bad company. Pandora and their management deserve a lot of credit for building a viable business that has shocked an entire industry. At the time of the IPO the company had 80 million registered users.
SPOTIFY IS THE REAL DEAL
Spotify is a game changer that could threaten to steal a lot of Pandora's steam. Like Pandora, Spotify's free service is financed through advertising revenues, but they provide a very different user experience compared to Pandora Media because you actually have direct control of your musical content. They are a much better integrated with iTunes and could see additional leverage as they continue to partner with other companies.
We recently wrote about Spotify's partnership with Chevrolet as the car company rolls out the new Chevrolet Sonic. This was just the latest example of a company that knows how to market their product. Spotify may further differentiate themselves from Pandora and other competitors by focusing as much on advertising as on the technological aspects of the company.
We are not the only ones who have come to appreciate Spotify's new place in the industry. The NY Times' technology reporter David Pogue recently wrote glowingly about Spotify.
SIRIUS HAS STRUCTURAL ADVANTAGES
As we discussed above, Pandora and Spotify are important players in the new music industry and they are be taken very seriously but, Sirius XM continues to maintain a structural advantage because they provide much of their own content, are better integrated with automobiles and because they control their own distribution channel.
SIRI is not just a music streaming entity, it also provides proprietary channels that listeners would not be able to access elsewhere. Their most notable proprietary show may be the Howard Stern Show, but other notable personalities include Eminem, Bill Walton and Paul Oakenfold. In addition, they have also successfully developed a portfolio of exclusive sports content.
While this is not a durable advantage, smartphones are currently not optimized for the automobile based experience and as such, it should continue to limit the ability of companies like Pandora and Spotify from competing against SIRI. We do not view this as a strong competitive advantage because technology is changing fast and companies like Research in Motion (RIMM) are trying hard to adapt their smartphones and operating systems to an automobile setting. RIMM's purchase of QNX was largely based on its desire to evolve the smartphone market by among other things creating smartphones that are fully adapted to various settings, including automobiles.
Last but not least, tiered cost pricing from wireless bandwidth providers will put a ceiling on the data transmitted over smartphones. This in turn limits Pandora and Spotify's ability to compete against SIRI in the automobile setting. AT&T (NYSE:T) ended their unlimited pricing plan for new subscribers on June 7, 2010. Verizon Communications (NYSE:VZ) followed a similar path by ending unlimited data plans in July 2011. Sprint Nextel (NYSE:S) continues to offer unlimited data plans, but the trend seems clear; bandwidth costs will only rise. While the internet streaming products will continue to be popular to users with Wi-Fi access (at least in the near term), metered pricing makes Pandora and Spotify uncompetitive compared to Sirius XM Radio.